In 2014, my wife and I were told we had to finally grown-up. We graduated college, completed residency training, joined the workforce, and even welcomed our first child. However, we couldn’t consider ourselves grown-ups until we had made one major purchase, our first home! My wife and I are both pharmacists that moved to Cleveland, Ohio for work. We had been saving up the standard 20% down payment for our home since we started our first “real” job after residency, but weren’t sure if we could call a place home that has so many cloudy days. However, after a few short years, we had built up our down payment, established ourselves professionally, and ventured around enough to realize why so many people had tried to sell us on living in Northeast Ohio. After we felt comfortable with the area, we finally decided to take the plunge and buy our first home! Regardless of what your journey to buying a home looks like, there are several important points you should consider to make sure you are maximizing the value of your purchase.
Understanding the preapproval process
To use a pharmacy analogy, think of preapproval letter as the prior authorization of the home buying world. In essence, receiving preapproval simply means a mortgage lender has looked at your entire financial picture and they’ve specifically let you know how much money they will lend you to purchase your home. This helps to prevent you from shopping around for homes you can’t afford. It also allows you to shop around for the best deals and interest rates from various mortgage loan providers. We didn’t start shopping for our home until we had received our preapproval letter.
One word of caution – try not to move your money around in the six months prior to when you will be seeking preapproval. You may not have given this much consideration, but taking out large amounts of new debt, opening a bunch of new credit cards, or buying several high-priced items can negatively affect your credit profile and in turn the amount of home you are preapproved for. I would suggest minimizing these transactions as much as possible in the months leading up to buying your home. We kept a close eye on our credit in the year prior to purchasing our first home.
Don’t max out your spending power
One of our personal life principles is based on the fact that we need to have breathing room in our finances. It is a conservative approach, but one we have felt has produced much more fruitful living. Life is always more peaceful when you leave for work 15 minutes early, don’t wait until the last minute to start working on a project, and have a buffer between your expenses and the income you are bringing in. This is one of the main reasons my wife and I decided to qualify for a mortgage loan on only one salary. Since we are a dual-income couple, we could have qualified for a home that was twice the price of the one that we actually purchased (with a man cave and in-home movie theater to boot!). However, we just didn’t have financial peace knowing that would mean we really would be counting on two incomes to pay our mortgage. Life is much more enjoyable when you have financial breathing room because inevitably financial difficulties do arise (think the Mayhem guy from the Allstate commercials). If you have a buffer, those difficulties won’t turn into financial crises. There is nothing wrong with buying the home of your dreams, but if it means you are constantly worried about your finances, I’m not sure it really was your dream home to begin with. [Your Financial Pharmacist Comment: This is outstanding advice. Purchasing a home well within your means, and not just based on what the bank will allow you to borrow, will pay off dividends in terms of being able to focus on achieving your other financial goals rather than being ‘house poor.’]
Consider additional expenses outside your mortgage
One area that many first-time buyers are surprised by is the fact that there are some hidden expenses with owning a home. If you are used to renting like we were, you might be caught off guard by property taxes, Homeowners Association fees, home owners insurance, home repairs, and other maintenance costs that renters are not concerned with. I like to think of these as sleeper costs because you may need some Ambien to sleep, if you weren’t expecting them. Personally, these costs total roughly 50% of my monthly mortgage payment. Therefore, make sure you budget for these extra expenses and don’t just assume that having a monthly mortgage equivalent to the rent you were paying previously will mean you are paying the same amount for your new home.
Along these lines, I would also recommend considering a 30 year fixed mortgage. My wife and I found value in procuring a mortgage that gave us a lower interest rate and a more affordable monthly payment. We have every intent to pay off the loan in 15 years, but if we encounter any significant unexpected expenses, we will have a greater level of flexibility to appropriately address those potential financial hardships that we would not have with a 15 year mortgage. [Your Financial Pharmacist Comment: My wife and I also have a 30-year mortgage with plans to pay it off in 15 years or less. However, if I had to do it all over again or was giving advice to someone buying a new home, I would recommend a 15-year mortgage for two main reasons. One, it has a lower interest rate (almost 1% lower on a 15-year fixed compared to a 30-year fixed at the time of this article being published) and two, the larger monthly payment that comes along with a 15-year mortgage will more often than not result in the buyer choosing a more affordable home than what could be bought with a 30-year mortgage.]
Consider the resale value of the house
If you are like the majority of people, you probably won’t be living in the home you buy 30 years from now, which is why it is important to take into consideration the resale value the house offers. Often times you do not want to buy the biggest and nicest house in the neighborhood, since it only appeals to a small amount of buyers. You likely will have a difficult time reselling your home if you paid $400,000 and everyone else in your neighborhood paid $300,000 to $330,000. In many cases, the least expensive house on the street actually has the highest trade-up value per square foot of home.
Another noteworthy consideration to take into account would be how do the schools in your district compare to the schools in your surrounding districts? Schools can affect the total value of a home up to as much as 20%. We referenced Cleveland Magazine to investigate the rankings of private and public schools in Northeast Ohio for an apples-to-apples comparison of the overall value our local school district brought to our home.
Additionally, we recommend that you verify there is nothing physically wrong with the home that would detract from its value. Would you buy a diamond ring without having its quality verified? Then make sure you do the same for your home with a home inspection. Costs can vary (~$375-$550) but could end up saving you much more. A home inspection gives you an unbiased expert opinion about the quality of your home. If any issues are found, you can use them to negotiate for a lower price on the home or require the seller to fix the issues as part of your final contract. At the end of the day, we believe the risk of not inspecting your potential home is not a risk worth taking. We found out that we had a costly window leak in our home inspection and were able to negotiate a repair prior to closing on our house. The cost of this repair far outweighed the financial investment we made by hiring a home inspector.
Let emotions subside before you decide
Last, but certainly not least, don’t let your emotions cloud your judgment. In all reality, this may be the most important point. When it comes to making a major financial decision, it is best to do so when you are calm and have had sufficient time to do your due diligence by taking all factors into consideration.
One excellent way we helped conquer our emotions was by setting a boundary that we would see no less than five houses before we made an offer and signed any contracts. This helped to prevent the “falling in love at first sight” syndrome, since we already decided that we wouldn’t immediately place an offer on the first house we visited. After all, there are plenty of fish in the sea and there was not necessarily a perfect match that would meet all of our requests without causing us to overextend ourselves financially. We also found that by visiting more homes we actually had a better sense of what we were really looking for. We ended up visiting around 20 homes before making an offer on our current home.
Another valuable piece of advice is to find a quality, seasoned real estate agent who knows your local market at a high-level to keep you accountable. Patients seek us out for medication advice because they lack the knowledge base to make informed decisions. Hiring a real estate agent is really no different. They are better able to weigh the current market conditions, how a home stacks up to others in the area, resale value, and countless other variables that are necessary to examine before buying a home. We chose a real estate agent that had decades of experience which made her a great resource for our search.
At the end of the day, don’t beat yourself up if you get a little emotional. After all, it is the biggest purchase most of us will ever make. Just make sure you are not letting your emotions run your decision making process. Do your homework, evaluate several homes in your area, hire a reputable real estate agent, and you will be able to make a decision that you won’t regret. The right house is out there waiting for you and the timing will work out eventually, if you are patient. We ended up searching over a time period of six months, and don’t regret being patient to wait for the right home to come on the market.
One Last Thing
I will leave you with one final reminder. Everyone has an opinion and you will likely get input from many different individuals when you tell them you are looking for a home. Remember that you are not obligated to act on this advice, even if it is from your own mom and dad! You are the one who will be responsible for your decision, regardless of the decision you make. Additionally, family and friends may not know the local housing market all that well, especially if they live several hours away. Therefore, make a decision that you are the most confident with while keeping in mind your other financial goals and you will be on the path to being a proud homeowner for many years to come!
Your Financial Homework: If you are looking to buy a home, take a step back and consider how the mortage payment (and all the associated expenses) will fit into your monthly budget. Does this amount allow you to achieve your other financial goals (e.g., paying off debt, saving for retirement, etc.)? If not, can you look for a home at a lower price that will allow room in your monthly budget to achieve those goals? If you currently own a home, is there value in refinancing to a 15-year fixed mortage (interest rate of ~2.8% at the time of this article being published)? Before saying yes to a refinance, determine what the closing costs will be and then figure out how long it will take you to breakeven on those expenses based on your monthly savings from a lower payment.
ABOUT THE AUTHOR:
This article was written by Ryan Brodman, PharmD, BCACP. Ryan is a 2009 graduate of The University of Toledo and currently works as a clinical pharmacy specialist at the Cleveland Clinic. Shortly after entering college, several pharmacy colleagues helped him realize you can outspend any income. He’s been trying to live a more frugal and rewarding life ever since. If you have any questions about his article, feel free to e-mail him directly at firstname.lastname@example.org